Stephen Bainbridge's Journal of Law, Religion, Politics, and Culture

August 2017

08/28/2017

EW offers up a list of 30 books "of books out there about fantastic lands, bloody history, political intrigue, family backstabbing, and fire-breathing dragons" to tide us over for the interminable wait. I "borrowed" that idea to offer up a list of my own (in no particular order). It's mostly fantasy, but with some SF too. I tried to pick series that create a future history filled with intrigue:

Books to Read if You Need More 'Game of Thrones' - The Fellowship of the Ring: Being the First... by J.R.R. Tolkien https://t.co/24LDC7ejXy

Shareholder activists say they shake up companies by bringing in new, better ideas. What they don’t bring, it turns out, is women. Or people of color.

Firms targeted by activists end up with more white men on their boards, often replacing women and minorities in the process, according to a study by proxy voting firm ISS. The researchers looked at 380 board seats spread across 93 companies in the Standard & Poor’s 1500 Index targeted by activists between 2011 and 2015.

A separate Bloomberg News analysis of the same period found that five of the biggest U.S. activist funds sought 174 board positions on Standard & Poor’s 500 companies in the same period but nominated women only seven times.

The ISS study -- which looked at directors nominated by dissidents and by the boards themselves in response to activism -- found that women made up 8.4 percent of this group, compared with 25 percent of new directors at all S&P 1500 companies in 2015. People of color accounted for fewer than 5 percent, compared with 13 percent of new S&P 1500 directors that year.

In other words, boards not subject to an activist campaign were more likely to increase board diversity.

Over at Above the Law, Prof. Kerriann Stout wrote 10 Things That Will Absolutely Piss Off Your Law Professor. She notes it is not an exhaustive list, but it is a good one and worth a read. This year, I added a new bit of information to my first day of class about how to interact with me about absences and workload.

Disgorgement of ill-gotten gains long has been a basic tool in the Securities and Exchange Commission’s (SEC) penalty toolkit, despite a paucity of statutory authorization. Because disgorgement lacked a statutory framework, courts have had to flesh out the sanction via interstitial rulemaking. In Kokesh v. SEC, the US Supreme Court took up the seemingly technical—but surprisingly important—question of what statute of limitations applies to SEC disgorgement actions. More important, at least for present purposes, the Court’s opinion cast into doubt the validity of the seemingly well-established disgorgement sanction.

Earlier cases based the SEC’s authority to seek and the courts’ power to impose disgorgement on the claim that it is a form of equitable ancillary relief. If disgorgement is a penalty, however, courts lack that power and the SEC lacks that authority. This conclusion follows necessarily from the basic premise that there are no penalties in equity and the complete absence of any statutory authority to impose disgorgement as a legal sanction. Now that the Supreme Court has made clear that disgorgement is, in fact, a penalty, the future of the disgorgement penalty looks bleak.

Some corporate law scholars have concluded that auditors do not have sufficient legal incentive to detect securities fraud and should be governed by a strict liability standard. This study assesses this argument by examining a dataset of 554 class actions alleging an accounting restatement filed from 1996 through 2007. Because some but not all of these restatement cases named an auditor defendant, it is possible to analyze whether variables such as the liability standard affect both the decision to name an auditor defendant as well as the outcome of the case. Despite the narrowing of auditor liability under Rule 10b-5, auditors are still often named as defendants and pay substantial settlements in Rule 10b-5 cases. A more restrictive liability standard is associated with a modest reduction in the rate at which auditors are named as defendants and the rate at which auditor cases end in settlement. If a Rule 10b-5 case against an auditor is strong enough to result in a settlement, the legal standard does not affect the size of the settlement. The auditor’s payment is correlated with nonlegal factors such as whether the issuer is bankrupt and the issuer’s market capitalization. These results are best explained by the tendency of judges to read narrow liability provisions broadly in cases where the size and impact of the alleged fraud are significant. The evidence thus does not support the conclusion that a strict liability standard is necessary to generate sufficient incentives for auditors to detect substantial frauds.

The Texas Gulf Sulphur decision was the seminal moment in the creation of the modern federal insider trading prohibition. In the half century since it was decided, however, courts and commentators have overlooked the glaring flaw in the court’s analysis.

In the key part of the opinion, in which the court laid out the equal access standard, the court grossly misrepresented the precedents on which it relied. The court cited two state law opinions that were wholly irrelevant to the problem at hand. It cited two law review articles, but those articles simply do not say what the court claimed they said. Finally, the court made a bald, unsupported statement of Congressional intent that is demonstrably false.

No matter how many tax scandals are revealed in the media – and there have been many in the past year, involving a diverse set of taxpayers ranging from Donald Trump to Apple – what is most remarkable is that, by and large, the public has considered them relatively non-scandalous. This was not always the case. During the 1930s, even the most innocuous tax avoidance maneuvers, such as buying tax-exempt bonds, were attacked as morally suspect. When did that change and why? This Article offers a novel attempt to gauge the respectability of tax avoidance – using a unique, hand-collected dataset of newspaper advertisements for tax planning services in prominent national papers between 1930 and 1970 – and concludes that a shift occurred after World War II. The Article then explains the reason for this shift, suggesting that a combination of extremely high rates, a broadened base of taxpayers subject to that rate, and a deterioration of the wartime consensus for the rate structure laid the foundation for the respectability of tax avoidance in the 1950s and 1960s. In effect, just as the high wartime rates for the wealthy had been justified as a means of compensating for the sacrifice of the poor during the war, the pursuit, and tacit approval, of tax avoidance after the war was a means of compensating for the high rates at a time when the sacrifice rationale for them had ceased to be compelling. This history parallels the modern experience with corporate tax shelters and has lessons for those seeking to reform the current tax system.

This paper contains a short introduction to VisiLaw and a complete, VisiLaw-marked copy of the Delaware General Corporation Law, including all laws enacted during the Delaware legislature’s regular session ending June 30, 2017. VisiLaw is a system for marking statutes to make them easier to read. The markings visually separate sentences, and clauses within sentences, making it easy to see where each begins and ends. The ability to see sentence structure at a glance makes it possible to read clauses one at a time, without losing orientation in the overall structure. Within each constituent clause, underlining identifies a skeletal sentence – subject, verb, direct object and a few other words. The underlining enables the reader to quickly get the gist, and understand the structure, of the constituent clauses.

08/21/2017

The dispute revisits a question the Supreme Court answered 40 years ago in Abood v City of Detroit Board of Education: whether public-sector unions may charge a fee to non-members for the cost of negotiating their contracts. The unanimous court in Abood began with the premise that many states require all workers in a particular sector to be represented by a union and that members and non-members alike benefit from their work. Given this arrangement, the court reasoned, so-called “agency” or “fair-share” fees preserve “labour peace” and prevent employees from hitching a free ride on the backs of their dues-paying colleagues. Teachers, firefighters, policemen and other public employees are not required to join a union, and they cannot be forced to contribute to a union’s political or ideological work, Aboodheld. But they can be charged a fee for the union’s efforts to bargain for their salary and benefits. ...

Mark Janus, a child protective services employee in Illinois, is represented by and pays agency fees to AFSCME. But Mr Janus, who thinks AFSCME has contributed to his state’s “budget and pension crisis” by backing spendthrift candidates and pushing for fiscally irresponsible contracts, says “the union’s voice is not my voice” and “the union’s fight is not my fight”. As his petition to the justices reads, the Abood rule requires him “to subsidise AFSCME’s efforts to compel the state of Illinois to bend to the union’s will” regarding a series of proposed cost-saving reforms. According to his lawyers, that violates his First Amendment freedom of expression.

The Economist then looks at the lineup and concludes it'll split 4-4, leaving Gorsuch to decide.

Everything seems to turn on Donald Trump’s choice to fill Justice Scalia’s seat: Neil Gorsuch. In the two-and-a-half months he sat with his eight colleagues in the term that ended in June, Justice Gorsuch established himself as perhaps the most conservative member on the high-court bench. But is he bold enough to overturn a long-standing court precedent so early in his tenure? In his Senate confirmation hearings, Mr Gorsuch professed an allegiance to stare decisis, the idea that justices should typically abide by the court’s prior rulings. He said that a ruling’s age, the degree to which the country relies on it and the solidity of its legal foundation all had to be weighed before jettisoning it.

I figure everything said in confirmation hearings these days must be disregarded as misdirection and misrepresentation. My guess. is that Gorsuch will side with the angels on this one. Say goodbye to agency fees.

As a non-unionized public sector employee who studies organizations for a living, I am in favor of unions in theory. Indeed, there is a strong case to be made for unionism from the perspective of new institutional economics, which is the...

So there I was casually reading Peter King's Monday Morning Quarterback column on SI.com, nodding along in agreement when I came up short at his top 15 list. New York Giants and Green Bay Packers in the top 10? I don't think so, and I sa...

Eileen Norcross of George Mason’s Mercatus Center has posted a new paper on the difference between public and private sector unionism: The public sector union movement shares a link to the history and institutional structure of privat...

Many things that are useful to individuals prove harmful when viewed from a society-wide perspective. Are passively managed indexed mutual funds one? A friend of the blog sent along a link to this WSJ story:

If investors continue to pile their money into passive index-tracking, at some point markets will stop doing their job of allocating resources efficiently in the economy. Perhaps they already have.

The threat is big enough that the world’s largest pension fund is preparing to put more of its money with active managers—who charge more and on average underperform—in an attempt to keep markets functioning properly. ...

Hiromichi Mizuno, chief investment officer of Japan’s $1.4 trillion Government Pension Investment Fund, worries that market efficiency will be damaged by the rise of passive funds, which rely on trading by active investors to set the price of stocks.

Obviously, passive management is the ideal way for retail investors (like you and me) to invest. Most of my retirement savings are indexed, for example.

Yet, the WSJ piece is hardly the first time global concerns have been raised about the trend towards passive investing. The New Yorker had a breathless piece back in 2016, for example.

So, are we collectively harming market efficiency? One problem is that a lot of the research on this area has been funded or conducted by people with a dog in the fight.

But while indexing could be a problem in theory, we are not convinced that indexing poses a problem in practice, for three reasons. First, while the quantity of actively managed assets has been shrinking recently, we believe the quantity of actively managed assets provides an imperfect indication of the amount of active management. Not all active managers are the same. Some are more “active” than others. There is wide variation in investment styles across the population of active managers, from the strength of each manager’s conviction to the size of the coverage universe and the level of trading activity.

Second, a growing number of indexed portfolios reflect “active” views insofar as they pursue goals which are commonly associated with active management. Smart beta strategies that provide exposure to common equity factors are one example. These increasingly popular portfolios may be indexed, but that doesn’t mean that they are “passive” in the same way that market-weight indexing is passive.

Third, many indexed portfolios are used to implement tactical (active) views within asset allocation strategies. Active investing still occurs, but via thematic portfolios and/or at the asset-class level rather than via individual stocks.

James Roberts argues that it's all about over-regulation: In the last few years, private companies have embraced the progressive principles of “corporate social responsibility” and joined “public-private partnerships” with various gov...

Haskell Murray: Recently, Apple CEO and director, Tim Cook, discussed the company’s commitment to the environment, the blind, and making the world a better place. Cook supposedly told investors: If you want me to do things only for ...

08/14/2017

Back in 2011 I got a request from the Chicago Law Review to join a group of academics that would referee articles for them, which pissed me off:

We are inviting a select group of academics to comment on the scholarly merit and originality of select articles in their scholarly discipline.

As I explained:

Either the student-edited format makes sense or it doesn't. The whole purpose of peer review is to get students OUT of the process, not to supplement a decision that would remain in the hands of second and third year law students. A pure peer review/edit system has several advantages. First, more informed and experienced decision makers should make better decisions. Second, one key function of peer review is to provide expert advice at a stage at which the authors can still tweak the paper. Hence, the advice should go directly from the reviewer to the author, rather than being mediated through students. Third, making the decision dependent on peer review provides a strong incentive for authors to heed the advice and to improve the paper. Giving students final say means the author is incented to make the students editors happy rather than the more knowledgeable reviewer. Finally, leaving the final decision in the hands of students means that the reviewer has less incentive to provide his/her best analysis, since his recommendations presumably will not be conclusive and may not even impact the final product. The proposed Chicago system being neither fish nor fowl, there is no reason to think it will combine the best attributes of peer and student journals. To the contrary, for the reasons just noted, I suspect it will combine their worst. ...

By the way, speaking of my twenty-odd years in legal academics without a Chicago law review publication, if 20 years worth of Chicago boards have rejected everything I've ever submitted to them, why does this board all of sudden think highly enough of my standing in the field to ask for a review? Recall that they "are inviting a select group of academics to comment on the scholarly merit and originality of select articles in their scholarly discipline." Shouldn't they be selecting people they've published? Or are they admitting that all those boards were wrong to reject all those articles of mine?

I hope this note finds you well. I am an Articles Editor for Volume 125 of the Yale Law Journal, and I’m writing to see if you might be willing to serve as a referee for a paper we are considering for publication in the Journal.

I gave them the same response I gave Chicago.

Today I got a request from NYU:

I am reaching out on behalf of the NYU Law Review. We are currently evaluating an article (attached) about [redacted], and I am writing to ask if you might be willing to provide a peer review.

Again, the editorial board of a journal that has rejected everything I've ever sent it thinks I should take time to give them a peer review?

Not going to happen.

Anyway, if my occasional rants amuse you, go read the whole 2011 post. I think it is one of my better rants.

As the name suggests, reverse veil piercing occurs when a third party outsider is able to reach corporate assets to satisfy claims against an individual shareholder.

Well, yes, but ....

As Todd Henderson and I explained in our book Limited Liability: A Legal and Economic Analysis, there are two types of reverse veil piercing. One type might be called insider reverse veil piercing, in which a shareholder seeks to disregard the corporate entity.

The other is so-called outsider reverse piercing, in which a personal creditor of the shareholder seeks to disregard the corporation’s separate legal existence to reach assets of the corporation to satisfy its claim.

Keith's definition only encompasses the latter.

This distinction is important, because in our view outsider reverse veil piercing is far more problematic:

Outsider reverse veil piercing effectively bypasses the usual method of collecting a judgment against a corporate shareholder, in which the creditor attaches the debtor’s shares in the corporation and not assets of the corporation. Unsecured creditors who relied on firm assets in lending to the corporation are thus disadvantaged. Similarly, if there are other shareholders, their interests are adversely affected if the corporation’s assets can be directly attached by the personal creditor of one shareholder. And, after all, the creditors of the shareholder-debtor can be satisfied by the debtor’s claim on the assets of the corporation indirectly, such as by taking the shares in settlement of the debt.

... under the category of “hopelessly confused”, I happened across the following description of Curci:

Reverse veil piercing may be available when the only shareholders of a limited liability corporation are both liable for a debt to a judgment creditor.

However, the case involved members of an LLC, not shareholders, and the entity was an LLC, not a limited liability corporation (whatever that might be).

This will doubtless set off friend of the blog Joshua Fershee, whose blogging career has included any number of complaints about this sort of lazy, mindless, stupid terminology use. As he recently noted:

Regular readers know that I monitor courts and other legal outlets for improper references to LLCs as "limited liability corporations" when the writer means "limited liability companies." I get a Westlaw update every day. Really. Every day. So while it may seem that I write about examples a lot, I tend to think I am showing great restraint.

Some might suggest that Joshua's developed an idée fixe verging on the Ahabian. But I must confess to sharing his annoyance. You see, misusing terminology leads to misapplied doctrine.

LLCs are not corporations. They should not be treated as such. Investors are heterogeneous and the best approach therefore is to offer them standard form contracts—off the rack rules—that provide significant choice. Courts will maximize investor welfare by letting investors choose the form best suited to their business. If courts and legislatures treat LLCs and corporations the same, they reduce the differences between the two forms and thus reduce the social welfare that comes from having different forms among which investors can choose.

Calling LLCs corporations leads to a mindset that treats them the same rather than that emphasizes their differences.